The Housing and Economic Recovery Act of 2008, signed in to law July 30, modernizes the federal low-income housing tax credit (LIHTC) program in several important ways. The following are 10 questions and answers on what will be a frequently discussed provision of the act.

Q: What did the act change?

A: The amount of LIHTC available to a project is calculated using eligible basis, which is basically the same as depreciable items. Sec. 42 of the Internal Revenue Code allows an increase in eligible basis of up to 30 percent for certain LIHTC projects. This “basis boost” results in a corresponding 30 percent increase in the maximum LIHTC subsidy.

Until July 30, the boost had been available only to projects located in geographic areas known as Qualified Census Tracts (QCTs) or Difficult Development Areas (DDAs). These are identified by the Department of Housing and Urban Development (HUD).

As part of the act, Congress added Sec. 42(d)(5)(B)(v):

Any building which is designated by the state [LIHTC] agency as requiring the increase in credit … in order for such building to be financially feasible … shall be treated for purposes of this subparagraph as located in a [DDA]….

With this change LIHTC allocating agencies have the ability to determine which projects will benefit from a 30 percent increase, in addition to those in QCTs and DDAs.

Q: Is there any federal guidance?

A: The following is an explanation of the new provision written by the Joint Committee on Taxation:

It is expected that the state allocating agencies shall set standards for determining which areas shall be designated [DDAs] and which projects shall be allocated additional [LIHTCs] in such areas in the state allocating agency's [qualified] allocation plan. It is also expected that the state allocating agency shall publicly express its reasons for such area designations and the basis for allocating additional [LIHTCs] to a project.

The explanation is not law but instead indicates Congressional intent. The extent to which agencies follow these expectations likely will be evaluated in an upcoming study of the LIHTC program conducted by the General Accountability Office (Congress’ investigative arm).

There is very little chance of additional federal guidance. Historically the Internal Revenue Service has allowed agencies broad discretion in implementing Sec. 42 through qualified allocation plans (QAPs).

Q: Is the boost available if the standards are not in a QAP?

A: Unfortunately there is no definitive answer at this point. While the Joint Tax Committee’s explanation above does not have the same legal effect as a federal statute, it is a clear signal of how Congress expects the basis boost provision to work. Certainly the better practice is to include standards in the QAP or the policies adopted annually thereunder.

The problem with doing so is that at least seven states had already finalized the rules for 2009 before the end of July, and several others were well under way. Amending a QAP or changing course mid-stream can be impractical or even logistically impossible. (The relevant considerations vary greatly from state to state.)

An agency still may be able to use the boost if it sets the standards in a process similar to a QAP: posting a draft for comment, holding a public hearing, and seeking approval by decision-makers above staff level. These steps are more than is required by Sec. 42 and fit within the spirit of the Joint Tax Committee’s expectations.

Some have suggested citing Sec. 42(m)(1)(A)(iv), which allows “a written explanation … for any allocation … which is not made in accordance with established priorities and selection criteria of the [LIHTC] agency.” While a possibility, this language relates more closely to the order of awards (i.e. point scoring) than amount of LIHTCs.

The bottom line for now is that tax practitioners have not yet reached a consensus, meaning these options may be insufficient for equity investors.

Q: What projects are eligible?

A: The provision’s effective date means projects placed in service after July 30 may utilize the basis boost. Therefore, in theory agencies could apply it to those already awarded LIHTCs in previous cycles. In practice this may not occur, or if so only rarely, in part due to the expectation that the standards be published and adopted beforehand.

This new provision in Sec. 42 precludes agencies from increasing the basis of projects with tax-exempt bond financing from the jurisdiction’s volume cap. Such projects remain eligible for the additional 30 percent if located in a QCT or DDA.

Q: Are agencies allowed to increase by less than 30 percent?

A: Yes, and they also have been authorized to do so for QCTs and DDAs. Under Sec. 42(m)(2)(A), allocating agencies are charged with limiting LIHTCs to the amount “necessary for the financial feasibility of the project and its viability … throughout the credit period.” IRS Form 8609, which finalizes the allocation, instructs agencies to “Enter the percentage to which eligible basis was increased. For example, if the eligible basis was increased to 120 percent, enter ‘120.’”

Q: Does an agency boost designation allow Community Service Facilities?

A: Sec. 42 excludes non-residential space designed for the general public from eligible basis. The one exception to this rule is for what are known as Community Service Facilities; these facilities must meet several criteria, including being in a QCT. Since the agency boost designation creates the equivalent of a DDA, it does not meet the federal requirements.

Q: How does HUD determine DDAs?

A: Under Sec. 42(5)(B)(iii)(I), DDAs are supposed to be areas with “high construction, land, and utility costs relative to area median gross income.” Instead HUD uses a ratio of Fair Market Rent to the maximum LIHTC housing expense (others were created by Gulf Opportunity Zone legislation). Thus DDAs are not based on difficulty of real estate development.

Q: What different types of standards are being considered?

A: The standards for agency designation fall into one or more of four general categories:

1. Geographic Area

These are specified jurisdictions or vicinities defined by certain criteria. Projects in such areas are less feasible due to high construction costs, low median incomes, lack of local funding, physical challenges (e.g. mountainous), or other factors.

2. Project Characteristics

An agency may want to encourage particular types of projects, such as supportive housing, and/or features like deeper income targeting or green building. These social policy goals often result in higher costs or reduced cash flow, necessitating additional subsidy.

3. Financial Feasibility

The agency-designated increase is an opportunity to effectively make up for costs not covered by LIHTCs because of being excluded from eligible basis. The best example is land. Normally these costs result in higher loan amounts, which if large enough can result in a proposal being infeasible.

4. All Projects

A few agencies, especially those in small states, may allow any awarded project to benefit. As is the case for any allocation, the actual percentage would be set based on what a project needs.

Q: What standards have allocating agencies proposed so far?

The following eight states have developed draft ideas for implementing the basis boost (listed in order of date made available). They are at different stages, but all are preliminary.


  • Counties with 2007 area median incomes (AMI) below $41,000.
  • Distressed counties in the Appalachian Regional Commission.
  • Scholar House projects, which are transitional living/learning settings for unemployed or underemployed single-parents with young children seeking self-sufficiency and pursuing an education.

North Carolina
Projects where the eligible basis without the boost would be a low percentage of the total development costs due to either:

  • high land costs because of being in a desirable or commercially valuable location, or
  • necessity of extensive site preparation and/or off-site costs.

Projects with market-rate units are ineligible for the increase.

Projects that demonstrate financial hardship due to changes in Davis-Bacon wage determinations.


Projects located in a county for which the Federal Emergency Management Administration has identified $3 million or more in housing need as of Aug. 11, 2008, and in which county fewer than 500 rental units in the aggregate have been allocated LIHTCs during the past three consecutive rounds.


Projects in the Rural Set-Aside, which includes those in counties with a population:

  • less than 85,000, except for those cities within these counties with a population of greater than 20,000; or
  • greater than 85,000 but less than 385,000 when more than an aggregated 25 percent of that county’s population resides in one substantially contiguous metropolitan area (includes land outside such metropolitan area).

Designates the entire state as a DDA in which any project may need the 130 percent basis adjustment to be financially feasible.


Includes projects meeting one or more of the following criteria:

  • In an officially declared disaster area by the state and will assist in providing affordable housing to people affected by the disaster.
  • Competing under the Housing First set-aside, which is community-based housing that targets the extremely low income (less than 30 percent of the AMI) with intensive service programs.
  • Competing under the Preservation set-aside, which involves the substantial rehabilitation of an existing structure, a development otherwise in danger of being lost as affordable housing, and/or the demolition and decentralization of housing units utilizing the same site.
  • Located in a high cost area that contains high land costs because of being in a desirable or commercially valuable location.
  • Necessity of extensive site preparation and/or off-site costs.
  • Demolition and new construction, rehabilitation of historic structures, and/or conversion of existing structures.
  • Leadership in Energy and Environmental Design (LEED) certified building(s).

Smaller projects (than 50 units) that either fully meet the voluntary Green Building standards, make at least 15 percent of the units market rate, or both.

Q: How can others have input?

A: Allocating agencies will not develop basis boost standards in a vacuum. Contact them with ideas, comments, questions, and suggestions on this and other QAP topics.

Mark Shelburne is the counsel and policy coordinator for the North Carolina Housing Finance Agency’s Rental Investment Department. He has been with the agency since 2001, and during that time has focused primarily on application review and the annual QAP. Previously, Shelburne was in-house counsel for an equity syndicator.